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Posted by Kevin Villani on April 26th, 2014 (All posts by Kevin Villani)

The political movement Occupy Wall Street has shaped the tax and spending proposals of the Obama administration’s budget and political debate on the premise that our capitalist economic system is rigged to favor the top-earning “one percenters.” But income inequality can result either from capitalism or politics, each for better or worse.

Historically, political elites focused on enriching themselves at the expense of the general public: In 1773 patriots threw the tea into Boston Harbor of the East India Tea Company, granted a “royal charter” in 1600. The U.S. system was founded not just on the principles of democracy but on limited government complementing private market capitalism that encouraged individuals to “pursue happiness” — accumulate wealth — on merit rather than political connections. Support for the less fortunate was provided by family members, religious and other charitable organizations.

Believing (wrongly) that class envy against the new economic elites — innovative entrepreneurs — would cause revolution, Karl Marx offered the socialist alternative “from each according to his ability, to each according to his need” with politics supplanting merit. Despite totalitarian methods universally employed by governments seriously pursuing the socialist model leading to the murder of tens of millions, one historian recently concluded that communism reduced workers “to shiftless, work-shy alcoholics.”

The concept of private insurance — spreading the risk — dates back over 4,000 years, whereas public “social” insurance dates only to the late 1800s when introduced by Bismarck to build popular support for universal conscription.

Social democracies such as Sweden with a relatively homogeneous population implemented the modern version of the “welfare state” in the 1970s by combining the concept of insurance with cross-subsidies — simultaneously spreading the risk and cost burden by implicitly taxing some to subsidize others, the cornerstone of Obamacare. Public sponsorship inevitably exacerbates the insurance “moral hazard” of encouraging excessive risk-taking while the subsidy incentive encourages increased consumption with less work effort, particularly in more heterogeneous societies that need to rely more on authoritarian measures than social pressure. The U.S. is now a highly regulated social democracy with a liberal welfare state — already totalitarian, according to Thomas Sowell. Yet recent research by Thomas Piketty concludes that the market system is still rigged in favor of the rich, recommending further political intervention including punitive taxes on the returns to capital.

The stakes are high. Labor force participation is at its lowest level since the 1970s and the optimistically labeled “economic recovery” is the weakest since the end of World War II. The U.S. has the highest corporate tax rate among industrialized countries and an increasingly oppressive regulatory regime. The rosy scenarios for avoiding default on the debt to finance the burgeoning contingent liabilities of the federal government require doubling economic growth, impossible without greater labor force participation and a massive increase in productive private business investment. Those promoting more social justice reject the obvious trade-off with economic growth.

Current economic stagnation among virtually all the social democracies — including autocratic pretenders such as Russia — reflects the growing power of political elites rather than any failure of competitive market capitalism. That’s the inevitable result of democracy unleashed, according to the Economist’s recent feature article on democracy confirming the wisdom of the founders’ original limitations. The recent multiple hundred million dollar paydays for former politician Al Gore (not for creating the Internet) and the paydays for Wall Street bankers bailed out by politicians during the recent financial crisis are contemporary U.S. examples of crony capitalism.

What’s rigged is the income inequality analysis. The most widely used measure of income inequality for the subsequent social democratic welfare state created at the beginning of the 20th century by the Italian statistician and fascist ideologue Corrado Gini before welfare state subsidies existed does not include them. Hence by this measure the more the welfare state grows, the greater the earned income disparity. Individual purchasing power, the only important measure, has not become less equal in the U.S. and upward mobility has not decreased.

The Occupy Wall Street protest had a legitimate concern but a bad sense of geography: Washington D.C. — not New York City — had the greatest increase in one-percenters during the last decade. They should Occupy Pennsylvania Avenue.

Villani, author and former chief economist at Freddie Mac, is currently an executive scholar at USD.

15 Responses to “Income inequality: Social justice or crony capitalism?”

It is a mistake to treat socialism as an economic theory, even when it is presented as one. It is not, nor has it ever been. It is a political theory dressed up with some economic concepts but is in fact just a roadmap for a self-chosen elite who none the less lack actual accomplishments, wealth or power to use the assets of the real elite to buy the support of the underclasses, which in a democracy will be enough to keep political power.

It is naked theft and bribery with the middle men controlling the flow of money and with it the flow of power. Those advocating for socialist economics are not really interested in the welfare of the people, what they are really advocating for is the means for themselves to take power.

I’ve little doubt that it’s true that “What’s rigged is the income inequality analysis”. I’ve never read a report of an income inequality analysis, whether within one country or between different countries, that was not conspicuously rigged by careful choice of inclusions and exclusions. I don’t see why Gini is to blame, though; it’s the analysts who are fools or knaves, not some long-dead statistician.

Dearieme, your example ignores the fact that “the safety net” is paid for with middle class taxes. Government is an entrepreneur, if you will, which convinces the voters to send it money with a promise that they will get more back than they contribute. The rich know they will pay less in taxes than they obtain because they can buy political favors. Since the Obama regime began, the actual interest rate on government bonds has been less than zero. Thus they are able to play in the Wall Street casino with Monopoly Money. The money they get back is real although it is worth less every year as the value approaches zero.

The poor get back welfare and other benefits, although they get less than they would have with stable money value and real work. The urban black “community” has traded opportunity for instant gratification and a sort of racial solidarity that reacts with rage to the few black conservatives. The Hispanics are divided into the illegal community, which seeks work and money to take back to Mexico but which has almost no leverage in the work world, and the legal community which is driven by social resentment and feelings of inferiority. Earlier immigrant communities were driven by work incentive but much of that has dissipated under the pressure of assimilation or racial resentment fostered by agitators.

The real middle class has been buffeted with political manipulation by phony issues like abortion and gay rights. The Roe v Wade decision may have begun the decline of the middle class as it focused the political arguments on non-economic matters like abortion. I am and was pro-choice because of what I saw before abortion was allowed. What has happened since is a parody of political action as the abortion rights people attached themselves to the political left and used the issue as a club to link the social to the political and exclude economics. The same has occurred with gay rights and “women’s issues” as the middle class has lost focus on its own best interests and chased ephemera.

After 2012 I am very pessimistic and do not see how the middle class will recover its senses. I see it in three of my five children. Two of them I cannot discuss politics with. One is a lefty but she is reasonable and I have hopes that, as she wants a child and may start to have middle class urges, she may not be lost. The other two are lawyers, one a government employe. Those two are following self interest but seem to exclude economics for the society as a whole.

I fear we are headed into a storm. The government we have now is fascist and fascist governments have usually covered up economic incompetence with causes. The Italians used the history of the Roman Empire, the Germans, the weird theories of the Nazis. The Democrats use social theories like sexual polymorphism and a sort of libertine and sexual hierarchy. All are bizarre and historians may someday wonder at them but they are leading us into disaster.

“Dearieme, your example ignores the fact that “the safety net” is paid for with middle class taxes. Government is an entrepreneur, if you will, which convinces the voters to send it money with a promise that they will get more back than they contribute. The rich know they will pay less in taxes than they obtain because they can buy political favors.”

All economic levels of our society are conditioned to paying less than expected and getting free stuff. It has to do with borrowing by the government based on the expected future value of what we have and what we will produce. Since the time horizon is beyond our life span and certainly beyond the political lives of the political elite, it will fall heavily on the young and not yet born. Without shifting the burden through intergenerational transfer and rolling over a good deal of the interest, there would be sufficient losers in this game to call the bluff. It probably would have happened before now if interest rates reflected actual opportunity costs of delayed consumption. Too bad money isn’t money.

Those, like myself, who are socially conservative on moral issues like abortion, gay rights, &tc. don’t see those issues as phony. We see them as the greater threat, an existential rot in a universal moral order. As proclaimed in Washington’s farewell address:

Of all the dispositions and habits which lead to political prosperity, religion and morality are indispensable supports. In vain would that man claim the tribute of patriotism, who should labor to subvert these great pillars of human happiness, these firmest props of the duties of men and citizens. The mere politician, equally with the pious man, ought to respect and to cherish them. A volume could not trace all their connections with private and public felicity. Let it simply be asked: Where is the security for property, for reputation, for life, if the sense of religious obligation desert the oaths which are the instruments of investigation in courts of justice? And let us with caution indulge the supposition that morality can be maintained without religion. Whatever may be conceded to the influence of refined education on minds of peculiar structure, reason and experience both forbid us to expect that national morality can prevail in exclusion of religious principle.

It is substantially true that virtue or morality is a necessary spring of popular government. The rule, indeed, extends with more or less force to every species of free government. Who that is a sincere friend to it can look with indifference upon attempts to shake the foundation of the fabric?

Promote then, as an object of primary importance, institutions for the general diffusion of knowledge. In proportion as the structure of a government gives force to public opinion, it is essential that public opinion should be enlightened.

Unchecked despotism exercised by any human institution, especially when enforced by violence, of which Roe is the most notorious of recent outrages, is the central target of conservative political action. For the socially conservative, if pursuit of material prosperity provides aid and comfort to pulling down such powers and dominions, it’s a blessing. If pursuit of material prosperity is twisted into the highest of ends and unnaturally inverted into the enemy of religion and morality, it becomes a curse indistinguishable from the godless materialism preached by Marx which they seeks, poorly, to fill men’s bellies while consuming their souls.

So far ignoring the rise of the machines has led to endless economic speculation. The automation of both physical and intellectual labor has made a profound difference in work.

Most of what nearly everyone decries as the end of various social establishments is simply that the guys who own the machines get the money they make.

This is the problem all advanced economies face. You gotta be somewhat smarter than average just to understand the complexities of the machines that are taking over to make a decent living. Average is what we are so it’s hard, and the increasing disparity in countries that do not manage this well … will not end well.

“who are socially conservative on moral issues like abortion, gay rights, &tc. don’t see those issues as phony.”

There are phony issues in so far as they take the attention of the middle class off of economics. The left has managed to make them issues of left and right, which they are not in economic terms. Young people, in particular, have been convinced to ignore their own self interest to go riding off after wind mills.

They are real issues but not just for the middle class. Race is another phony issue that I should have included. The Catholic Church in France succeeded in convincing the faithful to donate most of their production, not needed for life itself, for the salvation of their souls. The Church got very rich but the Revolution came. The anti-clerical sentiments that followed have lasted 200 years.

Today we have these matters of faith, abortion on the right and gay rights and global warming on the left, as diversions to keep the voters aroused. Anyone who believes in God should assume that women who have an abortion will be eventually punished in the afterlife. The obsession, to the degree that it diverts attention from economics and law, is evidence of doubts about God and His ability to punish sin.

6% govt bond yields would change everything. The proponents of the public-finance status quo are implicitly counting on interest rates to remain low and stable into the indefinite future. That is a risky bet.

“Anyone who believes in God should assume that women who have an abortion will be eventually punished in the afterlife. The obsession, to the degree that it diverts attention from economics and law, is evidence of doubts about God and His ability to punish sin.”

Following that logic, no crime need be defined, prevented, deterred, or punished as it will all be handled at the Judgement Throne. Fifty million murdered has significant social, political and economic consequences. Can not duck the issue of natural rights, the first of which is life.

The cancer eating at our political, social and economic system has its roots in our substitution of self for sound moral principles. Washington had it right as he himself witnessed in the outcome of the French Revolution. If we will not address that root issue, focusing on the practical results, whether crony capitalism or abortion, will only delay the consequences. I think the mass killing unborn humans ranks pretty high as an issue that highlights our moral bankruptcy. As such it illuminates the core issue. I can see no viable secular case for the kind of restoration of morality that is required.

“Following that logic, no crime need be defined, prevented, deterred, or punished as it will all be handled at the Judgement Throne.”

I agree but the US Supreme Court made abortion legal. I have no problem with the efforts to reverse or modify that decision. It is only the obsession that excludes other issues that troubles me. The left has managed to convince 47% of the population, or so, that economics doesn’t matter.

Obviously, I am a libertarian politically but the GOP risks all by avoiding that subset of conservatives. Not all social conservatives are economic conservatives and even less are libertarian in philosophy, which is to get power to let you alone.

I do agree that libertarian philosophy, what I call Big L Libertarianism, requires a peaceful and law abiding state and society. We certainly don’t have that now.

ok abortion at 4 weeks is different than 20 weeks(not to me) but you have wendy davis pols who want it up to 36 weeks. with so much contraception available including the "morning after pill" the abortion industry should be dying. it only gov't subsidy that keeps it going. like npr.

“the continued murder of the truly innocent maybe more pressing for concern than monetary gain.”

Ok. No argument. What about the desperate woman who is pregnant and will go to the jerk like Gosnell ? I saw them when I was a medical student before abortion was legal.

A friend of mine, a GP, was sued by a patient he had done a vasectomy on. The patient never came back for the sperm count he was told was mandatory. When his wife got pregnant, he sued the doctor who did the vasectomy. I suggested he offer to adopt the baby. He was a fundamentalist Christian, by the way, but never considered my suggestion. It would have been an interesting case. “Wrongful life. “

Mike – Your friend would have been thrown out of court. Common sense is not allowed. I can see the genuine heartfelt emotions in your soul as you talk about these matters. I have no solutions, but we must listen to those that do.